Friday, March 11, 2016

My longtime unproven theory is that one problem with modern chains/franchises is that local managers/owners really have little control over their businesses. The main thing that they control, or at least the main thing they can quantify and write down on the report that gets sent up to HQ, is labor costs. Almost everything else they can claim is beyond their control, whether or not it is. So the incentive to minimize reported labor costs is huge, even if it isn't actually good for revenues and profits. The mother ship basically controls the product and the marketing. It doesn't take a rocket surgeon to get that higher wages will likely reduce turnover, which will in turn likely improve service quality.

McDonald’s CEO Steve Easterbrook, who took the helm in 2015, has since moved swiftly, closing hundreds of weak stores, bringing back all-day breakfast, and simplifying the chain’s menu, reducing bottlenecks in serving customers quickly. But improving the customer experience hinges on workers being on board with all these changes, hence the raises.

“It has done what we expected it to—90 day turnover rates are down, our survey scores are up—we have more staff in restaurants,” McDonald’s U.S. president Mike Andres told analysts at a UBS conference on Wednesday. “So far we’re pleased with it—it was a significant investment obviously but it’s working well.”

The move reportedly created friction with franchisees, who hire and pay their own workers, as they felt pressure to match the wage hikes. Still, there are early signs it is paying off: In October, McDonald’s reported its first quarter of comparable sales gains in two years. The company built on that growth with a huge 5.7% increase in the following quarter.